New York Governor Andrew M. Cuomo (D) took two types of action when he was his state’s Attorney General in order to encourage better disclosure of the business risks from climate change. First, in 2007, he petitioned the Securities and Exchange Commission (SEC) to clarify that these risks should be included in company disclosures to the financial regulator. He also regularly investigated companies for failing to disclose their climate risks under New York securities laws.

In 2010, the SEC responded to these state-level actions and mandated that companies report their climate risks annually. Yet several years after the SEC took this action, the majority of companies still do not disclose their climate risks and the SEC does not enforce its own directive, according to an independent study released last fall.

Through adopting Cuomo’s approach in a larger, coordinated effort, Hart believes that state attorneys general have the political clout to push federal regulators to issue further guidance on climate risk disclosure and increase their enforcement efforts.

Current SEC regulations require each public company to file an annual Form 10-K with the Commission disclosing all “material” information and risks relevant to that company. Since the 1970s, “material risks” have included “environmental risks”; however, not until Cuomo’s actions did the SEC clarify that “environmental risks” also include effects from climate change. The SEC now specifically requires public companies to analyze how climate change will affect their businesses and to report their material climate risks in their required annual Form 10-K.

If applicable, companies must disclose climate risks that may result from current or potential climate regulation, international accords, and physical climate impacts. And, if relevant, companies also need to disclose indirect risks that may result from climate regulation or business trends, such as reduced demand for goods or services that produce substantial greenhouse gases or reputational harm from emitting such gases. For example, a truck company must report that national regulation of carbon emissions might reduce the demand for trucks or harm the company’s reputation. On the other hand, a hybrid car company would need to report that the same future regulation might increase demand for its cars.

According to Hart, companies’ current lack of disclosure is partly due to their uncertainty about how to disclose climate risks. Hart suggests that the SEC publish “best practice” examples and baselines of what climate risks should be disclosed, specifying when companies should try to provide relevant quantitative and methodological information.

Hart further argues that companies’ lack of disclosure is also a result of the SEC’s “minimal” enforcement. The harshest penalty for companies’ failure to disclose their climate risks accurately is a demand to rewrite the report, which is rarely enforced. Hart lists potential reasons for the SEC’s lax enforcement: the status of climate change as politically polarizing, the potential for SEC regulated companies to “capture” the agency, and the lack of resources to pursue enforcement initiatives.

Hart believes that New York Attorney General Schneiderman is best suited to spearhead both petitions to the SEC and company investigations because his office has the political will to address this issue. Hart also notes that the New York Martin Act gives the Attorney General great investigative authority.

The Martin Act provides the Attorney General with “the broadest and most easily triggered investigative and prosecutorial powers of any securities regulator, state or federal,” said New York corporate attorney David J. Kaufmann. For instance, New York courts do not have authority under the Act to review the Attorney General’s decision whether to investigate a company. Furthermore, private plaintiffs do not have a cause of action under the Act and thus cannot pressure the SEC in the same way that the Attorney General can.

Many companies’ shareholders and investors advocate for improved climate risk disclosure to inform investments and to enhance shareholder value. Yet some business interests oppose further SEC guidance, arguing that climate science is still unclear, existing environmental risk disclosure rules are adequate, and it is uncertain how useful the SEC’s climate disclosure guidance is for investors.

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Donald F. Kettl is the dean of the School of Public Policy at the University of Maryland. He is also a nonresident senior fellow at the Brookings Institution. Kettl is the author or editor of more than 20 books, including The Next Government of the United States: Why Our Institutions Fail Us and How to Fix Them (2008).